Monday, March 31, 2014

Speculators Get Fingers Burned in China

Speculators have been borrowing dollars to buy Chinese assets (aka the "carry trade"). They are gambling that the yuan will strengthen. However, the gamble has not paid off because (as per the Telegraph) the yuan has fallen 2.5% against the dollar since January.

The situation will be exacerbated as the US Federal Reserve brings forward plans to raise interest rates. 

Friday, March 28, 2014

Ukraine $18BN Bailout

Ukraine has secured an emergency bailout of up to $18BN from the International Monetary Fund to stave off imminent default. However, it will see no debt relief and will be forced to slash spending.
Arseny Yatseniuk, Ukraine’s Prime Minister, said his country was “on the edge of economic and financial bankruptcy”. However, in moves akin to the Greek crisis, he promised to comply with demands for drastic austerity (including a 50% rise in fuel prices).
However, unlike Greece, there will be no "haircuts". As such banks (including Russian ones) have been bailed out.

Let's see where this all ends up in a few months then!

Thursday, March 27, 2014

Ofgem Calls for Energy Investigation

Ofgem has stated that energy companies may be making excess profits and ripping off loyal customers. As such it has called for a full Competition and Markets Authority investigation that could result in the break-up of the Big Six (British Gas, SSE, Npower, EDF, Scottish Power and E. ON which control 95% of Britain's energy supply market).

Ofgem said that energy retail profits of Britain’s six largest energy suppliers had risen from £233M in 2009 to £1.1BN in 2012 “with no clear evidence of suppliers becoming more efficient in reducing their own costs”.

The Telegraph quotes Ofgem:
Further evidence would be required to determine whether firms have had the opportunity to earn excess profits.” 
Ofgem also said that suppliers were “consistently setting higher prices for consumers who have not switched”, who are often the most vulnerable and least engaged customers, while offering cheaper deals to savvy consumers.

It found evidence of "possible tacit coordination reflected in the timing and size of price announcements", which "reduces competition and worsens outcomes for consumers" although it is not a breach of competition law.

Dermot Nolan, Ofgem chief executive, said:
Ofgem believes a referral offers the opportunity to once and for all clear the air and decide if there are any further barriers which are preventing competition from bearing down as hard as possible on prices."
An investigation is likely to begin in June and to last at least 18 months, potentially two years.In other words the long suffering consumer will have to endure at least two more years of high prices and lack of transparency.

Wednesday, March 26, 2014

Government Sells 7.8% of Lloyds - Legalised Theft

The government has today announced that it has sold 7.8% of shares in Lloyds Banking Group, at 75.5p per share.

The government has now sold 36% of its original stake in Lloyds, which now stands at 24.9%.

Chancellor of the Exchequer, the Rt Hon George Osborne MP, said:
"I can confirm this morning that we have sold a further £4.2 billion of shares in Lloyds Banking Group at 75.5p a share, taking the taxpayer’s stake down to below a quarter of the bank. This represents good value for the taxpayer and the money will again be used to reduce the national debt.
This is another step in the government’s long term economic plan to deliver a more secure and resilient economy. It is another step in repairing the banks, in reducing our national debt and in getting the taxpayer’s money back."
The taxpayer paid an average of 73.6p per share when it was forced to rescue Lloyds in 2008. Thus the "profit" is little more than 1.9p per share, or £106.4M.

The sale comes at a time when Lloyds has been exposed as unilaterally reducing payouts to people who were mis-sold PPI. The bank’s behaviour has been described by one expert as “a scandal coming out of a scandal”.

An investigation by the BBC has found evidence to suggest that in some months the bank provided more than one in four PPI claimants – a figure that the bank disputes – with “alternative redress” – an obscure loophole that allows Lloyds to assume victims who were wrongly sold single-premium PPI policies on loans would have bought a cheaper regular premium PPI policy. Single-premium policies involve one-off payments, rather than monthly outlays.

Claims management companies told BBC Radio 4 that when they challenge Lloyds’ reduced offers on behalf of clients, the financial ombudsman has overruled the bank in every single case.

Cliff D’Arcy, an expert on the PPI scandal, said he believes Lloyds has reduced payments by tens of millions of pounds over the past year. He is quoted by the Independent:
“Frankly, I’m amazed that this problem has existed throughout the last year and hasn’t emerged into the light.

What’s happening here is a taxpayer-sponsored bank depriving taxpayers of their rightful compensation by using a loophole. It’s a scandal coming out of a scandal.”
The MP John Mann, who sits on the Treasury Select Committee, said:
 “This appears to be legalised theft and yet again it shows Lloyds as the unacceptable face of banking. This raises major questions for the Treasury, which has a multibillion-pound stake in the bank. ”
The government may be itching to relieve themselves of their stake in Lloyds, lest other scandals emerge that destroy value.

Tuesday, March 25, 2014

Russian Capital Controls and Macho Interest Rates Policy

Unsurprisingly, since the Crimea crisis erupted, capital flight from Russia has increased and may reach around $70BN over Q1 of this year.

Bartosz Pawlowski from BNP Paribas is quoted by the Telegraph:
It is shocking, markets have been extremely complacent, fooling themselves that Russia is invulnerable because it has almost half a trillion in foreign reserves. But reserves can become almost irrelevant in this sort of crisis.
There is now a risk of capital controls being implemented, as per Lars Christensen from Danske Bank:
Capital controls are a serious risk, and should not be discounted. Whatever now happens, there has been permanent damage to the Russian economy because investors are not going to forget this lightly.” 
Given that markets are driven by greed, fear and raw emotion, the very fact that capital controls have been flagged as a risk will now be the catalyst for ever larger movements of capital out of Russia. Thus the prediction will become a self fulfilling prophecy.

Additionally, as I noted in January, Russia is using interest rates to prop up the Rouble.This outdated macho policy of currency support has the effect of strangling the economy:
"A macho defence of one's currency is all very well in the short term, however in the medium to long term it will achieve nothing (as Britain's disastrous flirtation with the ERM in the 1990's showed). At some stage Russia will be forced to allow the rouble to float, or else face a recession caused by an excessively tight monetary policy.

Turkey’s “shock and awe” doubling of interest rates on Tuesday has failed to restore confidence in the lira, it too will have to allow the lira to go where the markets wish.

Suffice to say Russia, given its rigid mindset and macho self belief, will not in the near future allow the rouble to float. Instead it will continue to tighten monetary policy, and will impose capital controls to prevent currency flight.
This in turn will prompt other countries in East Europe to do the same, resulting in a general stagnation of the world economy as the flow of free moving capital dries up and people's confidence in the banking system is eroded."
Russia will learn, to its cost, that you cannot buck the market!

Monday, March 24, 2014

Co-op Needs Another £400M

The much maligned and previously ill governed Co-op Bank has discovered that it needs a further £400M, after unearthing more costs related to past misconduct.

The Co-op raised £1.1BN last year. However, it has discovered further costs related to mis-selling PPI, mortgages and interest rate swaps as well as "technical breaches of the Consumer Credit Act".

Niall Booker, chief executive, is quoted by the Telegraph saying that the result is the Co-op Bank is starting on its road to recovery with a capital position that is "weaker than in the plan announced last year."

The impact on the 2013 figures is expected to be between £1.2BN and £1.3BN.

The sins of the past catch up with you in the present!

Friday, March 21, 2014

MtGox Finds 200,000 bitcoins

MtGox the bankrupt bitcoin exchange that lost 850,000 bitcoins (valued at around £300M) has found 200,000 (£70M) of missing coins in a digital wallet dated 2011.

This hardly gives one confidence in the efficiency or security of the bitcoin exchanges.

Wednesday, March 19, 2014

Budget 2014 Live

Tuesday, March 18, 2014

Banks Still Too Big To Fail

Sir Jon Cunliffe, Deputy Governor of the Bank of England, is quoted by the Telegraph talking about the size of some banks:
We have made a lot of progress on too big to fail. But we are not there yet. I do not think we can say with confidence now that we could resolve a failing global giant, if we don’t hang together most assuredly, one way or another, we will hang separately.
Resolving global systemically important banks and ensuring they are international in death as well as life, mutual trust has to be built on common standards and rules to ensure banks have debt that can be safely bailed-in in the right amount and location.” 
Methinks that nothing is too big to fail, what Sir Jon actually means is that the banks are too big to imagine failing.

Friday, March 14, 2014

Beware The Bear

Markets are sliding as the point of no return wrt the Crimean vote on Sunday looms.

Once that vote is taken, Russia will be subjected to targeted sanctions from the West which will prompt financial retaliation (ie reciprocal sanctions) from Moscow. To add to the mix the acting president of Ukraine, Oleksander Turchynov, has warned that Ukraine must be ready for a Russian invasion at any moment and has called up the 60,000 National Guard.

Enjoy your weekend!

Thursday, March 13, 2014

We're Screwed!

The Institute of Economic Affairs (IEA) has looked to the future, beyond the 2015 general election, and pronounced that whoever wins based on whatever short term "promises" are made the hapless taxpayers of Britain are screwed.

The IEA has stated in a report "The Government Debt Iceberg" that Britain faces “crippling” tax rises and spending cuts if it is to meet the needs of an ageing population. It has calculated that the Government would need to cut spending by over 25%, or impose significant tax hikes because official calculations had failed to factor in future pension and healthcare liabilities.

The IEA is quoted by the Telegraph:
As populations age, tax bases will grow more slowly while government spending rises faster."
Britain faces tax rises equivalent within just two years to more than £300BN (17% of GDP) in order to meet all future spending commitments. This is larger than the entire annual NHS budget and would increase taxes from 38% to 55% of national income.

Philip Booth, the IEA’s programme director, said tax increases of this magnitude would be “impossible” to implement “without choking off economic growth and actually reducing tax revenues."

Mr Booth correctly notes that successive governments have, in effect, lied to the voters:
The underlying problem is that successive governments have made promises which can simply not be honoured from the existing tax base. The electorate is grazing a fiscal commons at the expense of future generations.”
In the absence of further tax hikes, Jagadeesh Gokhale, the author of the report, stated that spending would have to be cut by more than 25% or health and welfare expenditure by 53% compared with the current implied level if all future spending was to be met out of tax revenue.

Sadly the British electorate who have over the years been fed some many lies by the politicians, wherein hard choices can be avoided, are now not in a fit state to make those hard choices because they don't want to face them.

Wednesday, March 12, 2014

Bank of England Shaken By Rigging Allegations

Bank of England Governor Mark Carney has said that allegations of manipulation in the £3trillion a day foreign exchange market could prove to be a bigger scandal than the Libor rate rigging fiasco.

During a five-hour grilling by the Treasury Select Committee yesterday, Carney said that the bank was “ruthlessly and relentlessly” investigating the claims of manipulation, which has already seen the suspension of one member of staff from the bank.

Carney told MPs that it would create a new deputy governor position, with responsibility for markets and banking. That person would carry out "a root and branch review" of how the Bank conducts market intelligence.

Carney is quoted by the BBC:
"This is as serious as Libor if not more so because this goes to the heart of integrity of markets and we have to establish the integrity of markets."
He said the bank had no warning of the alleged manipulation before October.

Within 48 hours of hearing the allegations, the Bank had called in law firm Travis Smith to conduct an independent investigation. 

The chairman of the Treasury Committee, Andrew Tyrie, remains somewhat unconvinced:
"This is the first real test for the Bank of England's new governance structures. Early signs are not encouraging.

It has taken some time for the Bank's Oversight Committee to take the lead on accusations of misconduct relating to forex.

The public needs confidence that the Bank's governance structures will ensure that it gets to the bottom of forex-related misconduct allegations. The public also needs confidence that any misconduct in other areas will be discovered."
It is bad enough that "ordinary" banks rigged the system. However, for there to be reasonable suspicion that the Bank of England also was involved in such rigging is a hammer blow that may well do untold damage to Britain's standing in the financial world and the ability of the City to maintain its position as the "go to centre" for global finance.

Tuesday, March 11, 2014

Co-op Ungovernable

Euan Sutherland tendered his resignation on Monday as CEO of the Co-operative Group.

Sutherland joined the Co-op last May, and details of his £3.66M compensation package were published in the media this weekend. Chairman Ursula Lidbetter has yet to publicly accept his resignation.

Sutherland is of the view (as stated in his resignation letter) that the Co-op is "ungovernable", and that the leak of his remuneration package details was the work of those who wished to stop him enacting reforms within the group.

Monday, March 10, 2014

GDP Back To 2008 Levels

The British Chambers of Commerce (BCC) has said that the economy, which is currently 1.4% below its pre-recession peak in 2008, would exceed these levels in the second quarter of this year.

Despite saying last year that the level would not be reached until 2016, the BCC has upgraded its forecasts for growth to 2.8% this year and 2.5% next year, from previous projections of 2.7pc and 2.4pc.

John Longworth, director-general of the BCC, is quoted by the Telegraph:
"Our economic recovery is gaining momentum. Businesses across the UK are expanding and creating jobs, and our increasingly sunny predictions for growth are a testament to their drive and ambition."
BDO, in its own survey, also backed the BCC prognosis. Peter Hemington, a partner at BDO, said there was "markedly strong optimism and hiring intentions across all sectors of the economy".
However, according to the BCC, the UK is lagging behind Germany and the US where GDP is already well above pre-recession levels.

Monday, March 03, 2014

EU Corruption Breathtaking

The EU Anti-Corruption Report, published today, paints a grim picture of corruption being endemic across the EU.

The report's author, EU Home Affairs Commissioner Cecilia Malmstroem, said that the extent of corruption in Europe is "breathtaking"; it costs the EU economy at least 120BN euros per annum (the EU's annual budget).

Corruption erodes trust in democracy and drains resources from the legal economy.
Unsurprisingly the bureaucrats and politicians within the EU have managed to delay the release of this report, which should have been published months ago. Additionally, the report was also meant to cover EU institutions. However, the vested interests managed to block that part of the investigation.
As Cecilia Malmstroem told the BBC:
"The political commitment to really root out corruption seems to be missing.

The reason being is because the bureaucrats and the politicians in the EU treat the system as a gravy train which they have no intention of alighting from.

Putin In Another World - Markets Panic

As the crisis in Ukraine escalates, exchanges in Europe and Russia are falling and commodity prices (gold and oil in particular) are rising as people seek "safe havens" for their money.

Russian assets in particular are falling, and the Russian central bank increased interest rates (the one-week repurchasing agreement was hiked from 5.5% to 7%) in order to prop up the falling rouble.

Reuters reports that the rouble fell 2% to 36.41 against the dollar and 1.2% to 50.10 against the euro, trading at all-time lows.

The rouble-denominated MICEX index of Russian shares tumbled 9.1% to 1,314.8 points and the dollar-denominated RTS .IRTS collapsed 10.3% to 1,137.1 points.

In effect the markets are reacting out of fear and panic, as and when some clarity emerges the markets will settle. However, there will be significant periods of instability in the coming weeks as there is little evidence that clarity will emerge anytime soon; not least because (as per the New York Times) Chancellor Angela Merkel of Germany told Mr. Obama by telephone on Sunday that after speaking with Mr. Putin she was not sure that he was in touch with reality, people briefed on the call said. “In another world” she said.

Suffice to say, Putin and his cronies will have made a fortune on their gold and oil futures!